Public-Private Partnership (P3) Case Studies is an ongoing series featuring noteworthy P3 delivery of infrastructure projects. These case studies will focus on how P3 projects are structured, procured, and implemented. By discussing the challenges and successes of each project, this series will build a foundation of considerations for future infrastructure projects.
Infrastructure in America is a daunting challenge. In 2013, the American Society of Civil Engineers gave the nation's infrastructure a D+. The grade translates into an estimated need of $3.6 trillion by 2020 for the purpose of maintaining infrastructure in a state of good repair. As a comparison, the entire U.S. federal government expenditure totaled $3.5 trillion in 2013. The discrepancy between the investment shortfall and the financial reality suggest a need for alternative mechanisms to finance and deliver infrastructure projects.
What is a public-private partnership?
Public-private partnership (P3) is a project delivery tool characterized by risk sharing between the public and private parties. In a P3, the private party takes on the responsibility and risks of one or many functions in an otherwise publically managed project including designing, building, financing, and/or operating. The spectrum of P3 models ranges from privatization, where ownership and risks are transferred entirely to the private party, to a model where the private party is responsible for a specific function and the resulting risks of that one function. As the public sector relinquishes more control of functions, they also release more risk. On the other hand, as the private sector gains more control, they take on more risk. The tradeoff between control and risk sharing outlines the types of P3 structures.
Why a public-private partnership?
P3s are complex transactions that require careful execution. The complexities of the early planning process and negative public opinion have hindered a number of early transactions in the U.S. Additional political and financial challenges have also added to the woes of successful transactions. From 1985 to 2011, the US partook in less than 10 percent of the global P3 project flow. In comparison, Europe accounted for 45 percent of all P3s by nominal value.
More recently, a maturing P3 market and changing economic conditions have revived interest in the tool. The institutionalization of P3 pipelines in nations such as Canada have opened up the P3 conversation. The U.S. is unique in that the public sector is able to tap affordable capital through the tax-exempt market. However, recent budgetary strains have increased the financial and political cost of access to the tax-exempt market. In addition, the growing history of U.S. innovative financing mechanisms have broadened the acceptance of nontraditional project delivery tools including P3s. The expanding track record has produced experienced market participants as well as best and worst practices to help guide future developments. As a result, the U.S. P3 market has become significantly more mature and sophisticated with successes ranging from innovation structures like the Chicago Infrastructure Trust to large scale transactions including the multibillion-dollar New York Midtown Tunnel project.
P3s have a number of potential benefits. Although the public and private partners certainly have divergent interests, P3 is a platform to compromise in order to create improved efficiencies. Key value drivers include length of the transaction, ownership structure, responsibility share, payment mechanism and many others. Some benefits of P3s include:
- "Innovative" revenue: The public sector is able to access new sources of revenues to meet infrastructure demand. Some transactions have been successful in achieving budget neutrality where the transaction has no impact on public budgets.
- Cost savings: Savings derive efficiencies created by optimizing project responsibility by the partners' skillsets and resources. In addition, the aggregation of multiple functions can generate bundled savings through improved economies of scale.
- Risk sharing: By allocating project responsibility to the party who can best mitigate the risk, parties are more able to reduce any potential downside.
- Budget certainty: Long term budgeting and whole life cycle planning reduces budgetary uncertainties.
- Open process: A transparent, competitive procurement process is ideal to achieving competitive terms. As a result, transactions will often involve significant public participation and approval.
- Performance accountability: P3 agreements often include oversight mechanisms and project standards, as well as penalties to ensure performance.
MPC's forum on June 3, 2014 will discuss many of these concepts in further detail. MPC and co-sponsor Lazard will bring together the firms that advise and act for global infrastructure investors with local leaders to discuss the opportunities and challenges related to investing in Chicagoland’s infrastructure.
This blog series will look at successful examples of P3s across the U.S.: